Re: Definition of Fiduciary Proposed Rule (RIN 1210-AB32)

Dear Sir or Madam, 

We are writing in response to the request for comment from the Employee 

Benefits Security Administration (“EBSA”) within the US Department of Labor relating 

to the proposed rule change currently under consideration which would affect the 

definition of the term “fiduciary” under the Employee Retirement Income Security Act 

(“ERISA”).

By way of background, we are writing on behalf of the International Corporate 

Governance Network (ICGN). The ICGN is a global membership organisation of 

institutional and private investors, corporations, and advisors from 50 countries. Our 

investor members are responsible for global assets of US$12 trillion. The mission of 

the ICGN is to contribute meaningfully to the continuous improvement of corporate 

governance best practices through the exchange of ideas and information across 

borders. Information about the ICGN, its members, and its activities is available on 

our website: www.icgn.org. 

We are broadly supportive of the EBSA’s efforts to enhance the protections 

afforded pension plan beneficiaries through its proposed update to the rules defining 

the circumstances under which a person is considered to be a “fiduciary” under 

ERISA. As suggested in the proposal, we would anticipate these expanded criteria 

will extend to include several parties not currently covered by the existing regulation, 

such as certain types of investment advisors, consultants, and proxy advisory firms. 

We generally feel that increasing the notion of fiduciary responsibility 

throughout the investment chain will have a positive impact, not only for pension plan 

participants, but on the broader US financial system as well. ERISA imposes a strict 

duty of loyalty on pension fund trustees, which requires them to discharge their 

duties solely in the interests of fund participants and beneficiaries. Self-dealing by 

trustees is also strictly prohibited. However, since ERISA was enacted, an 

expansive industry of consultants and advisors has developed that now effectively 

exerts a strong influence over many pension fund decisions. As EBSA has noted, 

many of those consultants and advisors are not treated as fiduciaries, though 

trustees increasingly defer to their judgment. 

The result has been a steady erosion of protections afforded by the duty of 

loyalty. In fact, a 2008 survey of pension fund executives and advisors by CreateResearch concluded: 

"There is a widespread perception in the pension world that the investment 

industry is perverse in one crucial sense; its food chain operates in reverse, with 

By email: ORI@dol.gov 

Office of Regulations and Interpretations, 

Employee Benefits Security Administration 

Attn: Definition of Fiduciary Proposed Rule, Room N-5655 

United States Department of Labor 

200 Constitution Ave, NW 

Washington, DC 20210 

USA 

27 January 2011 
service providers at the top and clients at the bottom. Agents fare better than 

principals." (See, "DB & DC Plans: Strengthening Their Delivery," available at 

http://www.create-research.co.uk) 

In our view, an extension of the concept of fiduciary duty throughout the 

investment chain is essential to making the financial system work more clearly in the 

interests of its underlying clients. We would not expect that working more clearly in 

the interests of clients should lead to fee increases, but were this to happen we 

believe that such increased costs would be more than offset by enhanced 

performance from more reliable advice. An additional advantage of extending 

fiduciary responsibility is that it is an established legal principle, which should reduce 

the need for detailed rule-making. 

We would also like to comment more specifically on the proposed rule changes to 

the proxy advisory firms, given the EBSA’s explicit reference to these service 

providers in its release. With ERISA's recognition that proxy voting rights are an 

asset that must be managed in accordance with fiduciary duties, we believe it is 

appropriate to treat proxy advisory firms as fiduciaries. 

Our view is that proxy advisory firms provide a valuable service to institutional 

investors across the globe who have come to rely on their research, data, analyses 

and voting recommendations as an important tool to aid in the implementation of 

their voting policies. Many pension funds defer to proxy advisor recommendations, 

while others place great reliance on their underlying vote analyses. Overall, we feel 

that high standards for proxy advisory firm integrity will benefit not only the investor 

community but also companies and the markets generally, by facilitating more 

informed voting decisions. 

We are also extremely supportive of efforts by the Securities and Exchange 

Commission (SEC) to enhance the current US proxy voting system. Existing 

conditions evidence the timeliness and need for the type of changes presented in the 

SEC’s Concept Release No. 34-62495, File Number S7-14-10, relating to the 

reforms currently under consideration which would affect the US proxy system (also 

referred to as the "Proxy Plumbing Concept Release").

While the final responsibility for voting decisions should be placed on 

investors, we recognise the influence that proxy advisors exert and agree with 

concerns expressed by the EBSA and SEC about potential conflicts of interest which 

may arise when proxy advisory firms provide services to issuers or have significant 

business interests in an issuer. We believe that there is some scope for such 

conflicts to be managed more effectively and more transparently – and for them to be 

removed where they cannot be managed. We support addressing this issue by 

requiring increased transparency of proxy advisory firms, including detailed 

disclosures relating to their fees, client relationships, conflicts and research 

procedures. 

While we are supportive of both the EBSA’s and SEC’s efforts to address the 

potential conflicts of interest which proxy advisory firms currently exhibit, we do not 

feel that detailed regulatory rules governing proxy advisory firms’ research would be 

effective in achieving this aim. A more effective approach would be to emphasize 

addressing the underlying structural relationships which cause these potential 

conflicts. We believe that extending the definition of "fiduciary" to cover proxy voting 

advisors would impose a higher standard of conduct that achieves this regulatory 

goal without the need for additional detailed rules. 

We believe that it is a natural understanding of the EBSA proposal that 

fiduciary duty applies to the exercise of other ownership rights appurtenant to shares 
of stock beyond merely voting proxies, such as engagement with companies and 

dialogue with corporate directors. We would encourage the Administration to give 

active consideration to this area. This is now an established trend in other markets 

internationally. For example, the publication of the UK Stewardship Code by the 

Financial Reporting Council (FRC) in July 2010 marks a watershed for investors in 

the UK. It makes clear that fiduciary duty includes use of the full range of shareholder 

rights to manage shareholder value risks and opportunities at companies in which 

they invest, and it reflects the ICGN’s Statement of Principles on Institutional 

Shareholder Responsibilities (which we attach to this response). This thinking has 

already gained some traction in the US: for example, the NYSE Commission on 

Corporate Governance included a Core Principle recommendation in its 2010 Final 

Report that shareholders have a responsibility to "vote their shares in a reasoned 

and responsible manner and should engage in a dialogue with companies”. 

We believe that the US should initiate a process, with investor participation, to 

consider following a similar stewardship model. As progress continues towards 

codes of best practice for institutional investors in Canada, South Africa, the 

Netherlands and the EU, among other markets, there is an increasing risk that 

pension fund participants in the United States could become disadvantaged. 

It is within this context that we support the proposed rule change currently 

under consideration by the EBSA as part of its broader efforts to enhance fiduciary 

standards in the US market. 

We would be delighted to discuss these issues or provide additional 

information. Please do not hesitate to contact Carl Rosén, the ICGN’s Executive 

Director, by email at Carl.rosen@icgn.org or by telephone on +44 (0) 207 612 7098. 

Yours sincerely, 

Paul Lee 

Chair, ICGN Shareholder Responsibilities Committee